Nigerian Banks’ Performance – H1 2018

Financial intermediation in any economy is
largely impossible without any sound financial system. Moreover, with the
back dialing in the cycle, analyzing and taking an in-depth look into the
financial performance of banks have become inevitable.

Thus, this edition of the Proshare Confidential
looks at the performance of Deposit Money Banks (DMB’s) for the first half of
2018. Amongst many indicators that came to light, the study discovered
the growing dominance of corporate banking (product wise) and we also
highlighted the growing size of ‘the Treasury’.

The study showed an aggressive mobilization to
recover loans on the part of DMBs as they churned up N1,385 billion in total
interest income and N1,1278 billion in total operating income; which is 1.19%
and 1.09% of 2017 Gross Domestic Product respectively.

It appears that there is a
persistent tilt towards income from government securities from the DMB’s
either as a direct attempt to hedge against the possible dip in interest
income on loans or as a viable investment option given the economic realities.

Most DMB’s are preoccupied with reducing loan
assets and increasing the hold of treasury bills. This improves the amount of
liquid assets on the one hand and also improves their loan to deposit
ratio, as most DMB’s went to work to clean up
their balance sheet.

The recovery in oil prices coupled with the
ability to veer off the real economy has led to a diminishing in non-performing
loans. Therefore, they have been an improvement in the micro prudential
levels of the bank.

There current policy response to macro-economic
dynamics have forced DMB’s to resort to replenishments strategies -
locking into short term maturity, especially risk-free
instruments. This is largely reflected in their cash flow
statement(s), showing an improved pool of marketable asset; which reduces
the room of mismatch of risk.

The report showed a
strong correlation between low interest deposit expense and cost to
income ratio, banks with relatively low interest deposit expense ratio
have low cost to income ratio. Thus, banks with
relatively low cost of borrowed fund tend to have a low cost to
income ratio.

This would perhaps be the clearest justification
for the cautious attitude of DMB’s to the real
sector which remain a headwind to private
investment. It also hints to the fencing of financial
intermediation, especially to the informal sector.

The report highlighted
the softening in the interbank call rate as the
election cycle draws closer, underlining the
rising liquidity, thereby, forcing DMB’s to resort to indirect tools
to manage the rising liquidity.

As a follow through, the report also
commented on the CBN’s intention to use its base
money to create a scaffold for growth
and reduce unemployment moving forward.